The advance GDP report is expected to show the euro-area contracting another 0.1% in the second-quarter and the weakening outlook for the region should spark a selloff in the EURUSD as it fuels speculation for additional monetary support. Indeed, the EU lowered its growth forecast for the region as the debt crisis continues to drag on the real economy, and the threat for a deepening recession may fuel speculation for further rate cuts from the European Central Bank (ECB) as President Mario Draghi pledges to take the necessary steps to stem the downside risks for the union.

Recent Economic Developments

The Upside

Release

Expected

Actual

Euro-Zone Sentix Investor Confidence (NOV)

-21.0

-18.8

Euro-Zone Trade Balance s.a. (AUG)

8.2B

9.9B

Euro-Zone Construction Output s.a. (MoM) (AUG)

--

0.7%

The Downside

Release

Expected

Actual

Euro-Zone Industrial Production s.a. (MoM) (SEP)

-2.0%

-2.5%

Euro-Zone Retail Sales (MoM) (SEP)

-0.1%

-0.2%

Euro-Zone Unemployment Rate (SEP)

11.5%

11.6%

The rebound in confidence along with the resilience in building activity may help to generate a better-than-expected outcome for the euro-area, and a positive development may prop up the single currency as it curbs bets for more easing. However, the downturn in private sector consumption paired with the slowdown in business outputs may produce a sharp decline in the growth rate, and the deepening downturn should instill a bearish outlook for the EURUSD as ECB President Draghi maintains a rather dovish tone for monetary policy.

Potential Price Targets For The Release

As the EURUSD holds above the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50, with the relative strength index bouncing back ahead of oversold territory, the technical outlook certainly points to a near-term correction in the exchange rate. However, as the fundamental outlook for Europe deteriorates, we may see the euro-dollar continue to give back the rebound from the yearly low (1.2041) and the single currency remains poised to face additional headwinds over the near-term as the region faces a deepening recession.

How To Trade This Event Risk

Forecasts for an another contraction in the growth rate certainly casts a bearish outlook for the single currency, but a positive development may pave the way for a long Euro trade as it dampens expectations for additional monetary support. Therefore, if GDP holds flat or rebounds from the previous quarter, we will need a green, five-minute candle following the print to establish a buy entry on two-lots of EURUSD. Once these conditions become fulfilled, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade hits its mark in an effort to lock-in our gains.

On the other hand, record-high employment along with the slowdown in business activity may spur a sharp decline in the growth rate, and the weakening outlook for the region may drag the exchange rate lower throughout the remainder of the year as it raises speculation for a rate cut. As a result, if GDP contracts .2% or greater, we will carry out the same setup for a short euro-dollar trade as the long position laid out above, just in the opposite direction.

Impact that Euro-Zone GDP report has had on EUR during the last quarter

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

2Q A 2012

8/14/2012 9:00 GMT

-0.2%

-0.2%

-18

-50

2Q 2012 Advanced Euro-Zone GDP

Economic activity in the euro-area contracted 0.2% after holding flat during the first three-months of the year, and the threat for a deep recession may encourage the European Central Bank (ECB) to carry its easing cycle into the following year as the debt crisis drags on the real economy. The drop in GDP dragged on the exchange rate, with the EURUSD slipping back below the 1.2350 area, and the single currency struggled to hold its ground throughout the North American trade as it ended the day at 1.2318.

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